Sources: Vonage Is Eyeing the Exits

Several media reports last week have Vonage Holdings Corp. holding a $400 million to $600 million IPO as soon as this fall, but don't expect Vonage to be turning away any qualified suitors.

Most notably, The Deal.com reported Wednesday that Vonage was looking to go public, citing “sources familiar with the matter.” Interestingly, the story broke on the same day that Google (Nasdaq: GOOG) announced its entrance into VOIP with Google Talk (see Google Talks the Talk).

Light Reading has learned that some investment bank activity is only adding to the chatter. A well-placed source tells Light Reading that as many as ten investment banks participated in a "bake-off" two months ago to select which ones would participate in a possible Vonage IPO.

No winners have been announced, but the banks together stand to make a cumulative $42 million on a $600 million Vonage IPO, our source says.

But in the face of flattening voice prices, heightening competition from RBOCs and cable companies, higher costs for new customer acquisitions, and the threat of left fielders like Google Talk and Skype, answering every three months to investor expectations sounds like a bad case of heartburn for Vonage CEO Jeffrey Citron.

Indeed, conversations with Citron during the past year suggest the company is just as interested, if not more, in being acquired.

There may be some very good reasons for that. “The market position they’re in now can only get weaker; six months ago they had 50 percent of the market of paying residential customers in the U.S., but now Time Warner Cable has surpassed them," says VOIP industry analyst Jon Arnold of J. Arnold and Associates.

Arnold says that Vonage will need to win new customers from RBOCs and cable companies that are able to sell voice as part of a triple bundle, something Vonage cannot do (see Citron: Triple Play Is Tripe).

“If you are a public company you have to report earnings every quarter and meet expectations,” Arnold says. “So if I’m them, I’m thinking that an acquisition is a much cleaner exit strategy.” Even though Vonage is apparently considering an IPO, The Deal.com's story does say the company is pursuing a “dual-track” approach to liquidity, meaning that it would explore the IPO option while at the same time entertaining suitors. Meanwhile, Vonage has remained silent on the matter. Light Reading's attempts to reach Vonage for comment were unsuccessful Thursday, Friday, and Monday.

Vonage does face several challenges in the market -- not the least of which are the RBOCs which can leverage their ownership of the pipe that delivers the VOIP (see Insider Sees VOIP Battle Royal).

But the entire VOIP market is growing fast, and that bodes well for Vonage. According to research released Thursday by Infonetics, North American residential VOIP subscribers will jump from 1.1 million in 2004 to 24.3 million in 2008, with over 6 million new subscribers added in 2006, 2007, and 2008 (see VOIP Equipment Revenue Up 18%).

Also, Vonage’s bring-your-own-access model has not been a liability to the company’s growth so far. Vonage has proven adroit at enlisting the FCC whenever any broadband provider has attempted to block or degrade Vonage service (see FCC Rules on Vonage). The FCC took swift action against Madison River Communications earlier in the year when the carrier blocked ports carrying Vonage traffic (see Vonage Victorious in Blocking Case).

Finally, whatever path Vonage chooses, it has the added prestige of showing that it can raise money and win customers -- a noteworthy charm for investors and suitors alike. Vonage raised $200 million in capital in May, in a round led by Bain Capital, bringing its total capitalization to $408 million (see Vonage Raises Another $200M).

"With the latest infusion of capital, Vonage is poised to achieve its goal of becoming a billion dollar business,” Citron said at the time.

— Mark Sullivan, Reporter, Light Reading